The Big Green Buy

July 15, 2010

In the wake of the BP oil spill, some captains of industry have begun calling for government leadership to spur a clean-energy revolution. In June billionaire software mogul Bill Gates visited Washington and encouraged lawmakers to pony up public subsidies to triple clean-tech R&D funding from $5 billion to $16 billion annually. Gates explained to the Washington Post that much of what is touted as free-market innovation was born of government subsidies: "The Internet and the microprocessor, which were very fundamental to Microsoft being able to take the magic of software and having the PC explode, were among many of the elements that came through government research and development." And on his website Gates wrote, "When it comes to developing new sources of energy, and ways to store that energy, I believe the federal government needs to play a more active role than it does today."

Gates’s acknowledgment of the need for government intervention is welcome, but he and many others are stuck on "innovation." The fixation on new "game-changing" technology is omnipresent. Think of the metaphors we use: a green Manhattan Project or a clean-tech Apollo Program. It recalls Tocqueville’s observation that "the American lives in a land of wonders, in which everything around him is in constant movement, and every movement seems an advance. Consequently, in his mind the idea of newness is closely linked with that of improvement."

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Yet according to clean-tech experts, innovation is now less important than rapid large-scale implementation. In other words, developing a clean-energy economy is not about new gadgets but rather about new policies.

An overemphasis on breakthrough inventions can obscure the fact that most of the energy technologies we need already exist. You know what they are: wind farms, concentrated solar power plants, geothermal and tidal power, all feeding an efficient smart grid that, in turn, powers electric vehicles and radically more energy-efficient buildings.

But the so-called "price gap" is holding back clean tech: it is too expensive, while fossil fuels are far too cheap. The simple fact is that capitalist economies will switch to clean energy on a large scale only when it is cheaper than fossil fuels. The fastest way to close the price gap is to build large clean-tech markets that allow for economies of scale. So, what is the fastest way to build those markets? More research grants? More tax credits? More clumsy pilot programs?

No. The fastest, simplest way to do it is to reorient government procurement away from fossil fuel energy, toward clean energy and technology—to use the government’s vast spending power to create a market for green energy. After all, the government didn’t just fund the invention of the microprocessor; it was also the first major consumer of the device.

Call it the Big Green Buy. The advantage of this strategy is that it is something Obama can do right now, without waiting for Congressional approval to act. As such, it amounts to a real test of his will to make progress in the fight against climate change.

Consider this: altogether federal, state and local government constitute more than 38 percent of our GDP. Allow that to sink in for a moment. The federal government will spend $3.6 trillion this year. In more concrete terms, Uncle Sam owns or leases more than 430,000 buildings (mostly large office buildings) and 650,000 vehicles. The federal government is the world’s largest consumer of energy and vehicles, and the nation’s largest greenhouse gas emitter. Add state and local government activity, and all those numbers grow by about a third again.

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A redirection of government purchasing would create massive markets for clean power, electric vehicles and efficient buildings, as well as for more sustainably produced furniture, paper, cleaning supplies, uniforms, food and services. If government bought green, it would drive down marketplace prices sufficiently that the momentum toward green tech would become self-reinforcing and spread to the private sector.

The good news is that despite our sclerotic, largely right-wing Congress, government agencies are turning toward procurement as a means to jump-start clean tech and cut emissions.

Perhaps the most important move in this direction came in October 2009, when President Obama quietly signed Executive Order 13514, which directs all federal agencies to "increase energy efficiency; measure, report, and reduce their greenhouse gas emissions from direct and indirect activities; conserve and protect water resources through efficiency, reuse, and stormwater management; eliminate waste, recycle, and prevent pollution; leverage agency acquisitions to foster markets for sustainable technologies and environmentally preferable materials, products, and services; design, construct, maintain, and operate high performance sustainable buildings in sustainable locations."

The executive order also stipulates that federal agencies immediately start purchasing 95 percent through green certified programs and achieve a 28 percent greenhouse gas reduction by 2020. The stimulus package passed in 2009 included $32.7 billion for the Energy Department to tackle climate change, and some of that money is now being dispersed to business and federal agencies.

Already some federal agencies are installing energy management systems and new solar arrays in buildings, tapping landfills to burn methane and replacing older vehicles with plug-in hybrids and soon some all-electric vehicles. But it is the green procurement part of the executive order that is most interesting.

Government has tremendous latitude to leverage green procurement because it requires no new taxes, programs or spending, nor is it hostage to the holy grail of sixty votes in the Senate. It is simply a matter of changing how the government buys its energy, vehicles and services. Yes, in many cases clean tech costs more up front, but in most cases savings arrive soon afterward. And government—because of its size—is a market mover that has already shown it can leverage money-saving deals.

However, back on Planet America the asphalt transportation arteries are clogged with 250 million gasoline-powered vehicles sucking down an annual $200–$300 billion worth of fuel from more than 121,000 filling stations. Add to that the cost of heating and cooling buildings, jet travel, shipping, powering industry and the energy-gobbling servers and mainframes that are the Internet, and the US energy economy reaches a spectacular annual tab of $2–$3 trillion.

The clean-tech price gap is partly the result of old dirty tech’s history of subsidies ($72.5 billion between 2002 and 2008), but it is also the result of the massive economies of scale that the fossil fuel industry enjoys. In other words, gas pumps and gasoline are cheaper when you buy in bulk.

Closely associated with the price gap is another concept, which clean-tech developers call the "valley of death." This is the time in a technology’s life cycle when capital dries up, the time between a technology’s initial invention and its successful application as a moneymaking commodity.

A report by Ernst & Young found that a typical technological innovation—like the flatscreen TV or the cellphone—costs about $20–$100 million to invent but about $1 billion to deploy at competitive prices. Between government subsidies and capital markets, there is often enough financing available to invent new gadgets or buy into a mature and profitable business. But there is a dearth of capital for new companies trying to cross that gap between victory in the lab and victory in the market.

Smith Electric Vehicles, of Kansas City, is one company that would benefit immensely if government started robust green procurement. Currently Smith, the US affiliate of a British firm that has been making electric delivery trucks for eighty years, turns out about twenty units a month. The vehicles—flatbeds, refrigerator trucks, basic box-style delivery trucks—all require components that Smith buys on the open market.

"If we could buy gear boxes in batches of a hundred rather than ten at a time, they could be cast to our specifications rather than each one machined. That would immediately cut the cost by 30 to 40 percent," says Smith CEO Bryan Hansel. Similar savings would be available for other inputs like steel chassis, cabs, drive shafts, suspensions and wiring harnesses, all of which are purchased from the same suppliers used by diesel- and gas-powered vehicle makers.

In March Smith received a $32 million Energy Department grant that will help it offset the cost of its trucks. But what would really give it a boost is an order of 1,000 trucks a year for the next ten years, from, say, the Defense Department or the Postal Service or the General Services Administration (GSA). If that happened, Smith’s plans to open twenty more small manufacturing facilities around the country would shift into high gear.

"We have approached the DoD about nontactical vehicles, like trucks that are used on bases here in the US. They bought four of our vehicles for testing. So we’re hopeful," says Hansel. The Defense Department has 160,000 nontactical vehicles, many of which are suitable for electrification.

In other respects, the military is one of the most avid adaptors of clean technology. Of all the energy the federal government consumes, 80 percent is used by the Defense Department. The cost of delivering fuel to forward operating areas can be as high as $400 a gallon, by some estimates. And according to an Army Environmental Policy Institute report, 170 soldiers died and many more were horribly maimed just protecting fuel in combat zones during 2007. For purely strategic reasons the military is trying to free itself (at least a bit) from its clumsy and very long fossil fuel tether.

Thus the military is experimenting on a large scale with green technology. Fort Irwin, in California, is building a 500 megawatt (that is big) solar power plant and is on track to become self-sufficient in electricity use within a decade. Fort Leavenworth is undergoing an energy retrofit that a Pew report described thus: "energy efficiency improvements are made by a private-sector firm at no upfront cost to the Army, with resulting savings shared by the base and the contractor." The list goes on, but unfortunately most of the changes are relatively small scale.

Government procurement, particularly the military’s, would become significantly greener if two recently introduced bills became law. The Department of Defense Energy Security Act of 2010, introduced by Gabrielle Giffords of Arizona, would require the department to derive a quarter of its electricity from renewable sources by 2025. And—good news for Smith Electric Vehicles—the bill also calls, rather ambitiously, for a full-scale conversion of the military’s nontactical vehicle fleet to electric, hybrid or alternative-fuel vehicles by 2015.

A similar bill, introduced by Democrat José Serrano of New York, would require the Postal Service to purchase at least 20,000 electric vehicles by 2015. That goal is reasonable, and the USPS is a perfect place to start, as most of its vehicles travel in loops of less than 20 miles each day and always park in the same garage. Thus, even current battery technology is sufficient. Many other government fleets fit the same profile: they have regular routes of less than 100 miles a day and use the same parking spot each night, so they are easy and cheaper to charge because the price of juice drops at night.

Right now a vehicle from Smith is about 20 percent more expensive than a standard gas or diesel truck. But the cost per mile to run an electric truck is about one-third the cost per mile of a gas- or diesel-powered one. Hansel says that with enough large orders his product will reach cost parity with dirty-tech options. When that happens, large private-sector fleets, like UPS, FedEx, Staples and Frito-Lay, will start buying electric vehicles simply because it will be the cheaper option.

In anticipation of that day, Nissan is releasing the 2011 Leaf, a fully electric plug-in car. It plans to make 90,000 of them. Chevy is coming out with the Volt—10,000 of them. Will this first generation of EVs really have a market, and sufficient charging options? Who knows? But you can be sure they would if Big Government made the Big Green Buy.

Buildings also use lots of energy. The US Green Building Council reports that buildings account for about 36 percent of America’s total energy use and emit roughly the same proportion of greenhouse gases. But if properly constructed and managed, many buildings could actually generate energy for their own use, for vehicles or to put back into the grid.

The government’s building manager—its janitor, if you will—is the GSA. The GSA constructs, repairs and manages federal buildings; it buys the supplies and keeps the heat and AC on; and it buys and maintains much of the government’s nonmilitary vehicle fleet. It also acts as a purchaser and contractor of sorts for most other federal agencies. The GSA is about as dull an agency as you can imagine. It has pocket-protector and brown shoes written all over it. But in the age of climate change, its brief has taken on vital importance. The implications of Executive Order 13514 have put the GSA, along with the military, at the cutting edge of the Big Green Buy.

"We’re taking this very seriously," says Martha Johnson, administrator of the GSA. "We are normally sort of overlooked, but we were thrilled, really excited, when the president gave us such prominent place in his environmental strategy."

President Bill Clinton issued four executive orders on sustainable clean procurement, but they lacked specific targets or enforcement mechanisms and thus achieved very little. "Our progress in general in buying these products stinks," said Dana Arnold, senior program manager at the White House Office of the Federal Environmental Executive in a recent interview with the Federal Times.

This time it may be different, and the GSA is gearing up to be the point agency in what is sometimes called Environmentally Preferable Procurement, or "green supply chain management." The GSA is putting up solar arrays, buying a few electric cars and hybrids, trying to produce energy at its buildings and buying renewable energy like biomass, solar and wind power, which now account for 10.8 percent of the GSA’s federal building power supply. It is also creating monitoring systems to track progress and keep federal agencies accountable.

The GSA’s sustainability plan requires "a minimum of three percent renewable energy source for all competitive electricity supply contracts and requires that renewable energy be from a plant that was recently built in order to stimulate greater investment in the industry." The agency has reduced its own energy use by 15 percent, as measured against a 2003 baseline, and plans to reduce energy consumption in its buildings by 30 percent from that baseline by 2020. Already the GSA’s building stock—mostly offices—is about 22 percent more efficient than similar private-sector buildings.

In addition, the GSA is working on cutting the amount of jet travel its workforce requires and, when possible, increasing telecommuting and home-based work. It is also pressuring other agencies to shut off unused data centers—the USDA, for example, uses only between 10 percent and 20 percent of its total computing capacity, but its huge, largely empty servers run at 100 percent of power.

Other federal agencies, however, are lagging far behind. "It is amazing to us to find out the low level of awareness," says Linda Mesaros, a consultant for sustainable purchasing. State and local governments are also moving toward green procurement, but few have been very aggressive or ambitious.

Nor are the main pieces of energy and climate legislation focusing on procurement. The American Energy Innovation Council—which includes Bill Gates and executives from companies like Xerox, General Electric and Bank of America—is lobbying for a research plan and money and pilot programs all focused on expensive and spectacular new technology, like small fourth-generation nukes. The plan totally ignores the Big Green Buy strategy.

Another group, the Electrification Coalition—made up of CEOs from FedEx, Nissan and PG&E—has published an ambitious 180-page plan for converting America’s light-duty vehicle fleet to 75 percent electric miles by 2040. It also calls for radically upgrading America’s old, overburdened, semi-deregulated and thus chaotic electrical grid, which loses about twice as much power in transmission as it did in the 1970s. The EC is lobbying hard and has helped shape the Electric Drive Vehicle Deployment Act of 2010, legislation being championed by Representative Ed Markey.

But again, neither Markey’s staff nor the EC is comfortable demanding the Big Green Buy. "We don’t think that is the best approach" was all I could get from a Markey staffer. Instead, the EC proposes a Rube Goldberg–style scheme of geographic target areas that will receive multiple layers of consumer and industry tax credits and tax breaks—$7 billion total. That may sound big, but in the face of the climate crisis it is Lilliputian.

This approach is emblematic of the intellectual poverty of the political class and business elites. The bill is entirely too clever for its own good, painfully complicated in its tinkering instrumentalism, which in the end would do very little and do it too late, like an impoverished family scrounging for dinner money on the eve of their eviction. And the Electric Drive Vehicle Deployment Act will be red meat to the climate deniers and fiscal hawks. You can almost hear the derision now: if yuppies in Berkeley want to drive funny new plug-in cars, why do we have to pay for it?

Viewed broadly, there are four simple things the government can do to help close the clean-technology price gap and aid clean-tech business across the valley of death.

First, it can boost R&D as Gates has requested, but that alone won’t bring mass-scale green power on line.

Second, it can set up a Green Bank tasked with financing clean-tech businesses as they cross the valley of death. Along with loans, the government can offer more loan guarantees, which encourage otherwise frightened private capital to invest in clean-energy start-ups. The Waxman-Markey climate bill of last year included language to do that, but nothing like it is yet law.

Third, the government can impose mandates on the private sector requiring companies to adopt electric vehicles, purchase clean energy and conserve energy. Industry already lives with numerous rules that put limits on the anarchy of production. Yet in the crazy world of American politics circa 2010, forcing green procurement mandates on business would be very difficult.

So let’s get real. The fourth path is the best: a robust program of green procurement is the most immediate and politically feasible thing government can do to boost the clean-tech sector. And the only number that approaches the scale of the energy economy is government spending on energy. We need to be talking not about millions or billions but trillions of dollars going in a new direction. If the government is serious about electric vehicles—then just buy them already!

At one level, the mad Tea Partyers are correct: government is leviathan—a monster. But it is our monster, and with proper leadership even this government in the current climate could jump-start a clean-energy revolution.